To make sure I’m on Santa’s good list, I need to be honest – and, to be honest, the 2018 changes seem rather benign. In fact, as noted below, ISS hasn’t gone as far as some of its mainstream members in terms of encouraging board diversity and sustainability initiatives.

Here’s a quick rundown on the key changes for 2018:

Director Compensation: Director compensation – or at least excessive director compensation – has been looming ever larger as a hot topic in governance. ISS continues the trend by determining that a two-consecutive-year pattern of excessive director pay will result in an against or withhold vote for directors absent a “compelling” rationale. Since the policy contemplates a two-year pattern, there will be no negative voting recommendations on this matter until 2019.

Institutional Shareholder Services and Glass Lewis have issued their voting policies for the 2015 annual meeting season. For the most part, both proxy advisory firms’ 2015 policies are refinements of those already in place. However, companies should carefully review their 2015 annual meeting agendas against the updated policies to anticipate possible issues. A summary of the new policies and some issues they raise follows. You can find the ISS policies here and the Glass Lewis policies here.

ISS

Unilateral Bylaw/Charter Amendments: Under its current policy, ISS treats the following as “governance failures”: material failures of governance, stewardship, risk oversight or fiduciary responsibilities; failure to replace management; and “egregious” actions relating to a director’s service on another board. In what ISS refers to as “extraordinary circumstances,” the occurrence of one or more of these failures will generally result in withhold or negative votes for individual directors, committee members or the full board.

Beginning in 2015, ISS will create a separate category of “governance failures” consisting of bylaw or charter amendments, adopted without shareholder approval, that “materially diminish shareholder rights” or that “could adversely impact shareholders.” ISS regards the creation of a separate category as little more than a codification of current policy. As is typical, these standards leave ISS lots of wiggle room in determining voting recommendations.

On a quick read, neither set of voting policies seems to contain anything shocking, but both sets continue the march towards what the proxy advisors see as shareholder democracy. To paraphrase Jules Feiffer, I sympathize with their aspirations, but in some ways it looks like shareholder tyranny. Both ISS and GL are adamant about two types of by-law amendments: those that make the loser pay in meritless lawsuits and those that arguably impact shareholder rights without getting shareholder approval. ISS also tinkers with shareholder proposals on CEO/board chair separation. GL is also concerned about by-law amendments and continues to rail against companies that don’t satisfactorily implement majority-approved shareholder proposals. GL also continues to focus “material” transactions with directors.

I really do sympathize with at least some of the aspirations of ISS and GL. However, their policies reinforce the notion – with which I’m not at all sympathetic – that shareholders have the right to second-guess each and every decision that the board makes. For example, why does ISS think that shareholders are in a better position than the board to determine the board’s leadership structure? And if the board has no business deciding on its own leadership structure, why give it the power to do anything at all?

We’ll be posting a more detailed analysis of the 2015 voting policies on The Securities Edge within the next few days. For the time being, let us know what you think of them (or of my views).

Britney Spears has nothing on Institutional Shareholder Services, better known as ISS. ISS is rolling out proposed new voting policies for the 2015 proxy season. ISS often uses more words to tout how transparent it is than to explain its voting policies clearly, and the draft policies being considered for 2015 are no different.

One new proposed policy addresses voting on shareholder proposals on independent board chairs. ISS proposes to expand the list of factors that will be considered in developing a voting recommendation and to look at these factors in a more “holistic” manner. (The current policy is to support the proposals unless the company meets all of the criteria.) So this seems like a good thing. However, ISS indicates that the new policy is not expected to change the percentage of independent chair proposals that it will support. The obvious question is, then, how will the new policy really work? Your guess is as good as mine (which frankly isn’t very good).

The other new proposed policy provides additional information regarding the “scorecard” that ISS will use to evaluate equity plans. Like the independent chair policy above, some more criteria are laid out, but it’s impossible to tell how the factors – or, indeed, the new scorecard, will be weighed or will work – thus assuring that companies seeking shareholder approval of equity plans will have to continue to use ISS’s consulting service to find out whether a new plan will pass muster.

I could just as easily have referred to Yogi Berra as to Britney Spears, because if this isn’t déjá vu all over again, I don’t know what is.

On September 30, Bob Lamm moderated a panel at a “Say-on-Pay Workshop” held during the 11th Annual Executive Compensation Conference in Las Vegas, Nevada. The Conference is an annual event sponsored by TheCorporateCounsel.net and CompensationStandards.com – and emceed by our good friend, Broc Romanek – and features many of the pre-eminent practitioners in corporate governance and securities law.

The panel, entitled “50 Nuggets in 75 Minutes,” may just be the CLE equivalent of speed dating – each of five panelists covers 10 “nuggets” – practical and other takeaways to help them do their jobs better – in a 75-minute panel.

Here are Bob’s 10 “nuggets,” reprinted courtesy of the Conference sponsors and Broc.

1. Engagement is a Two-Way Street – At this stage of the game, shareholder engagement is – or should be – a given, and one of a company’s normal responsibilities. Along with that is the mantra “engage early and often”; in other words, don’t wait until you are faced with a negative vote recommendation to start reaching out to your major holders.

Interest in corporate governance has increased exponentially over the last several years, as has shareholder and governmental pressure – often successful – for companies to change how they are governed.Since 2002, we’ve seen Sarbanes-Oxley, Dodd-Frank, higher and sometimes passing votes on a wide variety of shareholder proposals, and rapid growth in corporate efforts to speak with investors.And that’s just for starters.

These developments represent the latest iteration of what has become part of our normal business cycle – scandals (e.g., Enron, WorldCom, Madoff, derivatives), followed by significant declines in stock prices, resulting in public outrage, reform, litigation, and shareholder activism.Now that the economy is rebounding, should we anticipate a return to “normalcy” (whatever that may be)?Are we back to “business as usual”?

Gazing into a crystal ball can be risky, but I’m going to take a chance and say “no.”While our economic problems have abated, I believe that the past is prologue – in other words, we’re going to continue to see more of the same: investor pressure on companies, legislation and regulation seeking a wide variety of corporate reforms, and the like.Some more specific predictions follow:

Increased Focus on Small- and Mid-Cap Companies: Investors have picked most if not all of the low-hanging governance fruit from large-cap companies. Sure, there are some issues that may generate heat and some corporate “outliers” that investors will continue to attack. However, most big companies have long since adopted such reforms as majority voting in uncontested director elections, elimination of supermajority votes and other anti-takeover provisions, and shareholder ability to call special meetings, to name just a few. If investors (and their partners, the proxy advisory firms) are to continue to grow, Continue Reading The shape of things to come in corporate governance

On Thursday, Institutional Shareholder Services Inc. (ISS) announced the launch of a new data verification portal to be used for equity-based compensation plans that U.S. companies submit for approval by their shareholders. This is a welcome change to ISS policy; although call me a cynic, but I believe this new policy has more to do with the SEC Staff’s recent interpretive guidance and less to do with actually improving their product.

As I have blogged about before, there are some real questions as to whether proxy advisory firms actually serve investors’ interests. While ISS and Glass Lewis are entitled to create a business model based on providing services to institutional investors, there has been either a market or regulatory failure that has forced public companies to consider corporate governance policies promulgated by two unregulated proxy advisory firms before making business decisions. Public companies should be making decisions based on what makes sense for their company and their shareholders and not based on trying to meet arbitrary policies of ISS or Glass Lewis (policies that seem to be continuously tweaked to keep the proxy advisory firms services relevant). To be fair, ISS and Glass Lewis claim that their policies aren’t arbitrary at all, but rather their policies reflect their clients’ views. Of course, for that to be the case, all of their institutional investor clients would need to have a monolithic view toward corporate governance.

Because institutional investors may own hundreds or even thousands of positions in public companies, institutional investors do not have the ability or the resources to research all of the issues facing each of those holdings. That is where ISS and Glass Lewis step in to provide guidance to these institutional investors. While some institutional investors have robust voting policies and attempt to make educated and informed voting decisions, Continue Reading Congress to the rescue?: Congressman hints at legislation to rein in proxy advisory firms

The PCAOB’s recently proposed auditing standards aim to “provide investors and other financial statement users with potentially valuable information that investors have expressed interest in receiving but have not had access to in the past” by changing the standard auditor’s report and increasing the auditor’s responsibilities. Sounds like a lofty goal, except that the information that they are proposing to require auditors to provide is either (i) self-evident; (ii) an infringement on the judgment of the issuer’s audit committee; or (iii) just plain not helpful. What the proposed auditing standards do accomplish, however, is to add more costs to being a public company just like their last proposal on mandatory auditor rotation.

Critical Audit Matters. Under the proposed auditing standards, an auditor will be required to include a discussion in its auditor’s report about the issuer’s “critical audit matters.” Difficult, subjective, or complex judgments, items that posed the most difficulty in obtaining sufficient evidence, and items that posed the most difficulty in forming the opinion on the financial statements are deemed to be “critical audit matters.” While this requirement may seem straightforward at first, the reality is that this “new” information should be self-evident by anyone who knows how to read a financial statement. Revenue recognition, estimates for allowances, pension assumptions, etc. are typically deemed to be “critical audit matters” by an auditor when planning audit procedures. These critical accounting policies are already discussed in issuers’ MD&A and in their financial statements. Further, any investor who actually is looking at the fundamentals of an issuer’s business and historical results should already be highly focused on estimates that, if wrong, could materially impact the financial statements. Auditors will end up being overly inclusive on what is deemed “critical” for fear of having Continue Reading PCAOB proposal piling on more costs for public companies (again)

On Tuesday, the Securities Law Committee of the Society of Corporate Secretaries and Governance Professionals met with officials from the Divisions of Corporation Finance, Investment Management, and Trading and Markets and the Office of the Whistleblower. While neither new Chair Mary Jo White (confirmed in April) nor new Director of Corporation Finance Keith Higgins (starts at the SEC in June) was present at the meeting, the Staff provided some important takeaways. Although the two hour meeting covered a significant amount of issues, the most important discussions involved the following topics:

The Staff’s focus will be on Congressional mandates. Although the Staff couldn’t give timelines, the remaining provisions from Dodd-Frank and the JOBS Act appear to be the focus of upcoming rulemaking activity. Agenda items such as mandatory disclosure of political contributions, while constantly popping up in the news as imminent, would not fit into the stated focus. The Staff noted that no one was working on rule making requiring the disclosure of political contributions, which is consistent with Chair White’s Congressional testimony last week.

Issuers continue to have problems with erroneous reports from the proxy advisory firms. The Staff noted that they continue to receive complaints from issuers specifically regarding errors, difficulty speaking to the correct person at ISS and Glass Lewis, and overlooking key aspects such as an issuer changing its fiscal year. The Staff has met with ISS and Glass Lewis over the past year and has requested that the advisory firms improve their transparency. The Society repeated its concerns with the proxy advisory firms and noted that the issues are acute when dealing with smaller issuers.

The Office of the Whistleblower is now adequately staffed and deep in implementation mode. While only one award has been made under the program, no imminent changes are expected, despite the musings of a recent New York Times article.

The Staff did a terrific job in responding to no action requests regarding shareholder proposals. All but 25 requests were responded to in less than 60 days. The Staff is very cognizant of the costs of missing printing deadlines and therefore reminds issuers to alert the Staff of not only print deadlines, but also notice and access deadlines.

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About this Blog

The Securities Edge is published by Gunster’s Securities and Corporate Governance Practice. Our blog focuses on securities law topics of interest to executives of middle market businesses. We try to focus on the most important issues of the day and distill the complex and convoluted into easy to understand blog posts so company executives can get up to speed and move on to what’s really important: running their business.